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The Seven Pitfalls of Business Failure and How to Avoid Them

03 September 2012

With the economic slump taking its toll on South African small businesses, many entrepreneurs are faced with the decision of closing down their businesses. Business failure happens when your business has reached a point where it can no longer continue operating without encountering additional and insurmountable problems. At this point, it is important that you accept your business failure, or you may face more financial and legal problems by trying to save your business. However don't lose hope. If you have recognized the failing signs early, Brian Civin says the actions you take in these circumstances will determine whether or not your business will survive. While there is no magic formula for dealing with this, there are things you can do that will give you the best chance. Before we talk about that though, it is important to know the pitfalls of business failure and try to avoid them. The following are the seven pitfalls of business failure.

1. You start your business for the wrong reasons.
Are you starting your business to make a lot of money? If so, you had better think again. On the other hand, if you start your business for the following reasons, you'll have a better chance of business success:

  • You have an enthusiasm and love for what you'll be doing.
  • You have drive, determination, patience and a positive attitude. When you come across challenges, you are more determined than ever.
  • Failures don't defeat you. You learn from your mistakes, and use these lessons to succeed the next time around.
  • You thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed.
  • You are resilient.  When you fall along the way, you've got the ability toget up and pick up where you left off.

2. Poor Management
New business proprietors often lack appropriate business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. Unless they recognize their shortfalls, and seek help, business owners may soon face failure. They must also be well-informed and alert to fraud, and put into place measures to avoid it.

A winning manager is a leader who creates a work environment that encourages productivity, has a skill at hiring competent people, training them and is able to delegate. A good leader should be able to think strategically, make a vision a reality, face change, make change, and foresee new possibilities for the future

3. Insufficient Capital
A common mistake for many failed businesses is having insufficient operating funds. Business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.

It is very important to determine how much money your business will require; not only the costs of starting, but the costs of staying in business. You need to consider that most businesses take a year or two to get going. This means you will need enough resources to cover all costs until sales can ultimately pay for these costs.

4. Location
Location is critical to the success of your business. A good location may enable a struggling business to ultimately survive and succeed, whereas a bad location can bring disaster to the best-managed business. Some factors to consider:

  • Where your customers are
  • Traffic, accessibility, parking and lighting
  • Location of competitors
  • Condition and safety of building
  • Local development programs for business start-ups in specific targeted areas.
  • The history, community flavor and approachability to a new business at a prospective site.

5. Lack of Planning
It is important for all businesses to have a business plan. Many small businesses fail because of basics inadequacies in their business planning. The business plan must be realistic and based on accurate, current information and well-informed projections for the future.

The basic components may include:

  • Description of the business, vision, goals, and keys to success
  • Work force needs
  • Potential problems and solutions
  • Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast
  • Analysis of competition
  • Marketing, advertising and promotional activities
  • Budgeting and managing company growth.

6. Overexpansion
Overexpansion often happens when business owners confuse success with how fast they can expand their business and it is regarded as a leading cause of business failure. A focus on slow and steady growth is preferable. Many rapidly expanding companies are now going bankrupt.

Expansion is only acceptable after a careful review, research and analysis. Identify what and who you need to add in order for your business to grow. Then, with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.

7. No Website
If you have a business today, you need a website. Every business should have a professional looking and well-designed website that enables customers to easily find out about your business, experience, and contact details at the least.

If you don't have a website, you'll most likely be losing business to those that do. If you want a free website for your business you can apply by simply filling our application form.

If your business is beyond recovery the following would help:

  • Get real- Do not allow status and ego to get in the way. Acknowledge thefact that your business has difficulties and deal with them. You cannot get any help if no one knows your situation.
  • Get help- As soon as you become aware that things are falling apart, you need to consult knowledgeable people.
  • Separate business from family and friends- You have to protect your family's assets and name, so think carefully before you ask a spouse for pension savings, or extend your bond. Your family cannot be bound to thesuccess or failure of your business.
  • Do only what you can afford -Stop banking on the ifs and maybes, and do not acquire expenses based on the expected income of transactions that haven't been concluded. Try to get rid of everything you can live without.
  • Negotiate- If you cannot meet your commitments, talk to your suppliers. They will try to help in most cases, because they do not want to write off what you owe them.
  • Negotiate with SARS- Should your tax payments be in arrears, talk toSARS as a matter of priority. Cited: Fin24.com, 2009.

Business failure does not always arise because of problems in your own business, but can happen through unconstructive actions made by other businesses, suppliers and customers. It is therefore important that you recognize the early signs of business failure before it is too late for the situation to be resolved.

 

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